The Best 4 Small-Business Neighborhoods in America

What is it about an entrepreneurial community that matters most to company builders? And where are they finding it?

To begin with, three requests: First, quit looking for the map everyone expects to find in a report like this. It's not here. Second, forget everything you've read in all those stories about "best places" to live, work, launch a company, or relocate the company you've already launched. The advice is usually wrong. Third, close your eyes and think of Houston.

If you're like most people, what you picture is an overbuilt oil town gone suddenly bust--all glass towers and tall weeds. What Charlie Wilson saw was opportunity. "I started in 1990, right dab in the middle of the recession," recalls the 29-year-old entrepreneur at his warehouse office in an industrial district just beyond the downtown high-rises. "The oil boom, the same boom that built this town overnight, was shot. By the time I got started, the whole infrastructure was here, but prices had crashed and everything was cheap."

So for Wilson--and many other Houstonians who noticed what he did--the city's problems provided the perfect backdrop for an entrepreneurial success. Wilson's company, SeaRail International, brokers salvaged goods (damaged electronics, spilled rice). What he needed, Houston had: low-priced warehouse space; big-league transportation capabilities (Houston's oil money had built the nation's third-largest seaport and ninth-largest airport); plentiful and flexible labor (skilled and unskilled to work by the day, the week, or the month); and a business community that encouraged him every step of the way. SeaRail's annual revenues have grown to $1.9 million, from $300,000 five years ago. And the city overall has seen a massive surge in business starts, producing one of the nation's most impressive economic turnarounds. Houston created more than 53,000 companies in 1996, ranking fourth among the nation's 200 largest metro areas in start-ups per capita. (See " The New-Economy Almanac.")

Nevertheless, you won't often find Houston on the lists of best business environments. And, indeed, for many companies it wouldn't belong there. What Charlie Wilson needs isn't necessarily what everyone else does. What's more, what Wilson needs isn't available only in Houston.

Which brings us to the dirty little secret of the "best" lists, which is that there are no one-size-fits-all best places (hence, no map accompanying this story and conveniently showing readers where to move). There isn't even a best place for you.

There are, however, best kinds of places. Ask entrepreneurs around the country to identify what makes a business community ideal, and two observations are inescapable:

1. Though the characteristics that matter most vary from one sort of company to the next, some are treasured universally, and they aren't the ones that the "best" lists rely on.

2. Four types of places emerge as more attractive than the rest--as places possessing some mix of characteristics that make them just right for certain kinds of companies. They are the boomtown, the science city, the reinvented district, and the networked neighborhood. Houston, a model of the reinvented district--which is notable especially for its undervalued resources and immigrant workforce--is the perfect fit for Wilson and SeaRail. But even the best of the other great small-business neighborhoods might have left Wilson underwater.

A Custom-fitted Location

A company like Searail might find consistently highly rated places like the Raleigh-Durham area, in North Carolina--with its inland location, poor plane connections, and paucity of immigrant workers--a less than ideal locale. Yet for a business like HAHT Software, a fast-growing maker of Internet-related programs, nothing could be finer than locating in Carolina. With its concentration of universities, numerous large software companies (including IBM's massive facilities and large branch operations of Silicon Valley transplants such as Cisco Systems), the Research Triangle has become a classic science city. It boasts tremendous advantages for high-tech enterprises like HAHT, particularly when it comes to recruiting software experts.

"We don't have to recruit," says chairman and CEO Richard Holcomb, who cofounded HAHT in 1995 and now has 56 employees. "I like finding people through word of mouth, and around here there's a lot of technical talent to choose from. If you're a fast-growing company with a neat product, people will find you."

With key industry resources in growing supply, the Research Triangle is beginning to see the kind of serial entrepreneurship that characterizes larger high-tech bastions such as Silicon Valley and Orange County, Calif., or Boston's Route 128. Holcomb himself is an example. Though he's only 35 now, he sold his first start-up--eight-year-old Q+E Software--for $40 million in 1994, laying the financial base for HAHT.

Carol Conway, on the other hand, has no wish to live in the next Silicon Valley, in part because she's already tasted the real thing. The former longtime IBM executive spent much of her career traveling between the leading technology hubs of the nation. When she wanted to start a business of her own, she looked for something different. "We wanted to live somewhere on the coast that had a low cost of living, with no state income tax," Conway recalls.

She and her husband ended up on Florida's southwest shore, a humid stretch of flat, marshy country cooled by breezes off the Gulf of Mexico. For years, the area, best known for the cities of Naples and Fort Myers, has been a destination for retirees and vacationers, but Conway discovered a low-cost locale and, more important, an exploding full-time resident population--a boomtown.

The region's sheer growth, she realized, was fueling a rapid expansion of small and growing service businesses--businesses that needed help maintaining their all-important computer systems. "And there was nobody around here with a background in on-site network support," says Conway. "The bread-and-butter businesses of our community are companies with 5 to 25 PCs. They need help, but they're not big enough to have their own information-service managers."

In 1993, Conway bought a struggling mom-and-pop computer-repair shop, the Computer Rescue Squad, for $125,000. Since then, the Cape Coral company has grown from 2 to 18 employees, serving 600 clients spread throughout the sprawling region. Sales last year topped $2.1 million, more than twice the total in 1995. "It's not Silicon Valley, but it's turned out to be a nice little horizontal market for us," Conway says.

Where Nick Rothenberg launched his company is not Silicon Valley either, but farther from Fort Myers you almost couldn't get. Rothenberg, cofounder of the Web-site developer W3-design, set up in the Hayden Tract area of Culver City, Calif.--a quintessential networked neighborhood.

Like Burbank, Glendale, and other nearby Southern California municipalities, Culver City has become a hotbed of technology-based entertainment and multimedia companies. "We've created an entrepreneurial community from the ground up," explains Rothenberg, who cofounded W3-design in 1994 with $10,000 borrowed from a relative. "Everything around here--from the coffee shops to the architecture--has been shaped to meet the needs of companies like ours."

Indeed, the architecture--obsolete red-brick industrial buildings--is just the kind of flexible, slightly retro space preferred by multimedia companies like Rothenberg's, which employs 27 people and posted $2 million in 1996 sales. But it's where the architecture stands and who else fills it that make Culver City a magnet for businesses like W3-design. In a rapidly changing industry characterized by one-project alliances (such as movies), you're only as good as the intellectual capital you have to offer and the access you have to people who might pay for it. Proximity to Hollywood and to one another is what the industry's company builders need to keep abreast of technical advances and find roles for their businesses on fast-forming project teams. The neighborhood is networked. For Rothenberg, being there--not being somewhere cheaper--is what matters.

What CEOs Treasure Most

Why don't the "best places for business" lists ever notice the Culver Cities of the country, let alone the Houstons? Because anointing the cheap is what most of them are about. Except when they're anointing sanitized, white-collar bastions like Seattle; Portland, Oreg.; or Provo, Utah--places where the journalists who make the lists and set the criteria fantasize about living. (Such places do sometimes qualify as science cities or networked neighborhoods.)

Surveys such as the Small Business Survival Foundation's list of places "good for small business" focus relentlessly on taxes, in the process dismissing the entire state of California--which continues to lead the way in creating fast-growing companies. The survey's highest rankings were reserved for states such as South Dakota and Wyoming, not exactly the nation's entrepreneurial hubs.

Similarly, an account in Forbes last year, headlined "It's the Costs, Stupid," tried to link high costs with slow growth and vice versa. But business costs represent only one factor, and by no means the most critical one, that determines a company's fortunes. Low costs can be associated with a booming economy, such as Las Vegas's, but low costs have not turned other inexpensive areas, such as Omaha, or Rochester and Syracuse, both in New York, into prodigious job-creating neighborhoods.

In most networked neighborhoods and science cities, costs don't matter at all. Consider the spectacular job growth experienced over the past two years by one of the nation's most expensive regions, San Jose, Calif., thanks to its entrepreneurial, high-tech economy.

So what does matter to growth-minded CEOs? The priorities differ according to the nature and the needs of the company (see the checklists in the Best Neighborhoods below), but taken together, here's what they tell us is important:

The right workforce. For some businesses that means low-wage, unskilled workers. For others, uniquely educated technicians. For still others, a pool of potential employees with experience functioning in entrepreneurial, chaotic organizations. (Think of Silicon Valley.)

Undervalued resources. Buildings, machinery, raw materials, human capital--all are comparatively less expensive in reinvented districts and sometimes in boomtowns. And those are costs that some entrepreneurs care about. Not many focus on tax rates.

A hungry market. That big sucking sound you hear is the noise of runaway growth and the pure opportunity it presents to entrepreneurs willing to meet needs that keep expanding. For small companies, especially in service businesses or building-related trades, the ride offered by a boomtown may be the closest thing there is to a sure thing--in the short run, at least. Las Vegas may be the exemplar.

Accessible intellectual capital. Universities and the graduates they attract to an area are the oldest form of that capital. Business and technological know-how, in companies increasingly inclined to share it, are the newest.

The right contacts: a network that's either industry-based or inclination-based. The networked neighborhoods provide those contacts best (they have to), but all the best neighborhoods nurture them in one way or another.

No distractions. The companies attracted to science cities are most likely to prize an ordered environment. ("It's an engineer's dream," said one founder.) But some boomtowns, too, are known for their uncomplicated, easy-to-manage environs.

Highly evolved small-business service organizations. These might be revamped chambers of commerce, growth councils, or university-based outreach programs. They're often found in reinvented districts--which have existing institutional frameworks and place a premium on an entrepreneurial turnaround.

A positive, enfranchised, respected business culture. Nothing matters more, and no great neighborhood can do without it.

Culture shock

Sometimes it takes an outsider to understand what really makes a great entrepreneurial neighborhood: the mood, the spirit, the sense of camaraderie that defines the place. The feeling that business occupies an honored position in the community and deserves to be nurtured. The optimism that makes for more enthusiastic bankers, more generous landlords, more plentiful allies.

In Houston, newly arrived entrepreneurs such as Charlie Wilson or Don Wang all comment on the remarkable supportiveness and can-do spirit of the local business community. Wang has grown MetroBank, which he helped launch in 1987, into Houston's ninth- largest bank--mostly by catering to immigrants. "In the 1980s, lots of people were giving up on Houston, but we stayed," he says.

In contrast to places like Los Angeles, whose established companies largely ran away after the catastrophes of the early 1990s, Houston's leadership seems to have coalesced during the hard times. "The guys who got all but wiped out stayed. In Houston, we still have the cowboy mentality," notes longtime Houstonian Fred Zeidman, president and CEO of InterSystems, a fast-growing manufacturer of compounds and blends for the plastics industry. "The people here found new industries and new people to turn this place around."

Much credit, Zeidman and others believe, belongs to the probusiness leadership of Mayor Bob Lanier, whose support extends into virtually every one of Houston's diverse communities, and the aggressive marketing of the nonprofit Greater Houston Partnership. But more significant has been the willingness of Houston's older business elite to help out newcomers, whether they're Southeast Asians or aggressive young hustlers like Charlie Wilson.

When Wilson began building Sea-Rail International, the local Young Entrepreneurs' Organization and a mentoring group called the Silver Foxes helped him meet such veteran businesspeople as retired developer Bubba Leavy and financier Monty Pendleton, each of whom provided critical strategic and financial advice to the young entrepreneur. "Those guys put me on the spot all the time, challenging how I do business," Wilson says. "'Don't get radical on me,' they're always shouting. You build a real camaraderie with them. In some ways, Houston's still a small town where everyone knows everyone and people like to see other people succeed. It's part of the magic of the place."

Perhaps more than anything else, it's that sense of connectedness that makes great entrepreneurial neighborhoods. With it comes a conviction about possibilities, not only for companies but for individuals--newcomers and traditional outsiders included--attempting to create the right environment for both business growth and a high quality of life.

"In a growing place like the Fort Myers area, there's really no established pecking order," observes Computer Rescue Squad's Carol Conway. "You feel you can come here, roll up your sleeves, build a business, and share in the growth of a great community. You're not just a shooting star out alone; you're part of a network of people."

Best Neighborhoods: The Boomtown

There are now scores of places like Fort Myers--small, growing communities attracting ever more transplants eager to improve their quality of life and, increasingly, their economic prospects as well. Unlike what's happening in places like the Raleigh-Durham, N.C., area, where engineering and software talent is the engine for economic growth, or Houston, which is rapidly reinventing a broken economy, the growth of the boomtowns is largely a matter of demographics--massive numbers of people moving in every year, creating new markets for services and opportunities for companies.

Since 1980, the population in the Fort Myers area has doubled to more than 410,000, with the influx of young professionals hiking the 25-to-44-year-old age group from fewer than 45,000 to more than 96,000. Those professionals only loosely resemble the techies who cluster in places like Raleigh-Durham. Instead of launching software companies, they concentrate their efforts in business-related services, which grew by about 44% from 1990 to 1994.

Boomtown drawbacks of Fort Myers? "It's a cultural vacuum," admits one CEO. "Bringing in young people or good minority workers can be hard." Adds another, "It can be tough getting people to work overtime. It's 90 degrees; people would rather put on shorts and grab a margarita."

Typical Boomtowns

Charlotte, N.C. Fort Myers, Fla. Las Vegas Orlando, Fla. Phoenix

Best Neighborhoods: The Science City

As in the boomtowns, people talk about "quality of life" around Raleigh-Durham, but the area's champions are more likely to boast about the region's many campuslike industrial parks and university-based incubators. Like other burgeoning science-based hubs, Raleigh-Durham has a highly ordered business culture that appeals to the high-tech crowd.

"Engineers and software people are folks whose whole lives are based on logic and order, so this place is perfect," says David Russo, an executive at Sas Institute, a 20-year-old privately held software company with revenues topping $653 million.

Even as the area's population has surged--86,000 residents moved in from 1990 to 1995--local businesspeople focus not on the numbers but on the "quality" of the newcomers. The Research Triangle prides itself on being a mecca for younger baby boomers and migrating entrepreneurs, most from the northeastern corner of the nation.

Credited with the development is the 1959 decision by North Carolina officials to develop an eight-mile-long industrial park in close range of three major local universities--Duke, the University of North Carolina at Chapel Hill, and North Carolina State University at Raleigh. At first, the project was oriented toward large corporate relocations and expansion. More recently, an entrepreneurial configuration has evolved . Last year, for example, the Research Triangle area boasted five companies on the Inc. 500 list.

Much of Houston's revival, like that of many reinvented districts, has been stoked by immigration. Just 10 miles southwest of downtown Houston, on Bellaire Boulevard among strip-mall stores advertising in Chinese and Vietnamese, is the headquarters of MetroBank, a small but growing financial institution that has funded much of Houston's thriving immigrant-based economy. Its founder, Taiwan-born former salesman and motel owner Don Wang, was among the hundreds of thousands of newcomers who poured into Houston during the boom times of the 1970s.

When the Houston economy tanked, domestic migration to the city went into reverse, with a net loss of more than 140,000 residents from 1985 to 1990. But Wang's clients, mostly immigrants, kept coming. By 2000, Houston's minorities--Latino, Asian, and African American--will constitute more than two-thirds of the city's population.

Amid the hard times and demographic shifts, Wang and his clients saw an enormous opportunity to pick up real estate, buy homes, and start businesses in fields such as food processing, distribution, and electronics assembly. "It was cheap to start a business here and easy to find good labor," Wang observes. "It still is. We consider Houston the best place in the country to do business, even if no one on the outside knows it."

There are networked neighborhoods of many kinds, but the most highly evolved are still in and around Los Angeles--where they've been spawned by the fleetingly collaborative, project-by-project habits of the film industry. One such community is Culver City's Hayden Tract neighborhood, where Nick Rothenberg based his 27-person Web-site development company, W3-design.

The Hayden Tract's location--next to Sony Studios and near the burgeoning film and video production centers of Venice and Santa Monica, as well as Hollywood--has made it easy for companies there to maintain relationships with the entertainment industry. Among W3's clients are the 69th Annual Academy Awards, Paramount Pictures, and Bandai Digital Entertainment, as well as AST Computers, Infiniti, and Kaiser Permanente.

The Tract's location also has helped spawn successful multimedia companies, including Website Magazine, Digital Planet, Lightspeed Media, and Cyberstudios. Big companies, too--for example, Kodak's Digital Imaging division--have moved in to be close to the action. Much of the appeal, Rothenberg says, is based on proximity to companies in the area--a particularly rare asset in a sprawling region like greater Los Angeles.

"It's the kind of place where I can call another CEO and say, 'Let's meet at the coffee shop down the street," Rothenberg says. "The only problem is, you have to be cool about it because your competitors might be listening."

Joel Kotkin is a senior fellow with the Pepperdine Institute for Public Policy, a fellow in urban studies at the Pacific Research Institute, and a contributing writer at Inc . Research assistance for this story was provided by Michael Lynch.

Resources

Are you thinking about relocating? These books will help pave the way. AnnaLee Saxenian's Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Harvard University Press, 800-448-2242, 1994, $24.95) assesses the forces that power two of the most economically dynamic regions on earth. Looking for action? Joel Garreau's Edge City: Life on the New Frontier (Anchor, 800-323-9872, 1992, $14.95) shows that the fringes of large cities nourish new business growth. And finally, consider with a jaundiced eye the materials that economic-development offices prepare to attract people just like you. For more information on areas mentioned in Joel Kotkin's article, consult the following sources:

While costs should not rule your choice of location, nobody can ignore dollars and cents. Regional Financial Associates (610-696-8700), in West Chester, Pa., compares typical business costs around the United States.